Weekend Reading For Financial Planners (July 13-14)

J.D. Power Study Finds Firm Culture, Leadership, And Autonomy Drives Advisor Retention

(Financial Advisor)

Financial advisory firms often pay close attention to their client retention rates, as maintaining a loyal client base offers the prospect of strong recurring revenue (and can potentially reduce the impetus to spend time or hard dollars to acquire new clients to replace those who depart). Though notably, in addition to client retention, a firm's ability to retain its advisors is also a sign of its health, as low advisor turnover can generate longer-lasting advisor-client relationships (and, as with clients, potentially reduce the amount of time and money spent on replacing advisors who leave). Which means that firm owners might be interested in the key factors that determine whether an advisor will remain with the firm or seek new opportunities.

According to a recent study by research firm J.D. Power of those in the broker-dealer channel, 34% of respondents who are employees and 41% who are independent indicated that they might not stay at their firm in the next 1-2 years (the firm also found that amongst those who indicated they "definitely would not" or "probably would not" be at their firm 3 years ago, about half were no longer at their firm, indicating that advisors' predictions of their planned departures are in fact a good indicator of the likely action they will subsequently take!). Comparing ratings of those who indicated they were committed to staying with their firm with those open to leaving, the study found that ratings for firm leadership and culture reflected the greatest difference (with professional development the next greatest difference for those who are less tenured at their firm) of which firms advisors would remain with (or not).

The findings are consistent with our own recent Kitces Research on Advisor Wellbeing (which surveys a broader sample of the financial advice community), that an advisor's overall wellbeing can play an important part in determining whether they might leave their current firm. For example, while 86% of "Thriving" advisors (those who rated their wellbeing as a 9 or 10 on a 10-point scale) indicated that they are extremely likely to stay at their current firm through the next year, while only 52% of "Struggling" advisors (who rated their life quality at 5 or less on the same scale) said the same (notably, 9% of "Struggling" advisors said they were extremely likely to leave their firm within the next year while only 2% of "Thriving" advisors said the same). Further, the study identified autonomy (i.e., having command over one's work schedule and confidence in one's ability to effectively perform their responsibilities), experience (having a proven track record in delivering advice to clients), and team (advisors who work within robust service teams and also highly value the concept of teaming) as factors associated with higher advisor wellbeing.

Altogether, these studies indicate that the key factors promoting advisor satisfaction with their firm go beyond quantitative elements such as compensation and include more qualitative aspects of working at a specific firm, such as strong leadership, firm culture, and command over one's work schedule (including the team support that allows the advisor to have more schedule flexibility). Which suggests that firms that invest in these elements (which do not necessarily come with a hard dollar cost!) could see a return in the form of more satisfied and loyal advisor workforce!

House Committees Advance Measures To Strike Down New DoL Fiduciary Rule

(Melanie Waddell | ThinkAdvisor)

After much anticipation, the Department of Labor (DoL) in late April released the final version of its latest effort, dubbed the "Retirement Security Rule" (aka the Fiduciary Rule 2.0), which is set to take effect in late September and (again) attempts to reset the line of what constitutes a relationship of trust and confidence between advisors and their clients regarding retirement investments and when a higher (fiduciary) standard should apply to recommendations being provided to retirement plan participants, with a particular focus on those not already subject to an RIA's fiduciary obligation to clients (i.e., brokers and especially insurance/annuity agents). At the same time (and not unexpectedly, given the product distribution industry's successful challenge to a previous iteration of the fiduciary rule), the Retirement Security Rule has already come under legal fire, with the Federation of Americans for Consumer Choice (an insurance industry lobbying group) and several other organizations representing the product distribution industry filing a lawsuit (joined recently by the Financial Services Institute and Securities Industry and Financial Markets Association) asking the U.S. District Court for the Eastern District of Texas to vacate the rule and provide a temporary and permanent injunction against its enforcement. The plaintiffs argue that the rule violates the U.S. Congress' intent in passing ERISA and that the DoL overstepped its authority in adopting the rule. 

While the fate of legal challenges to the Retirement Security Rule remains in limbo, some legislators are taking matters into their own hands. This week, the Republican-led U.S. House of Representatives' Education and Workforce Committee by a 23-18 vote passed a Congressional Review Act resolution to disapprove of the new fiduciary rule. While such legislation would prevent the regulation from taking effect, it would need to pass the full House and Senate and be signed by the president (or be overridden if the president vetoes it), which would appear to be unlikely for now as Democrats (who have been much more supportive of the DoL effort than have Republicans) currently control the Senate (and President Biden would be unlikely to overturn a rule created by the DoL under his administration). In addition, the House Appropriations Committee this week approved by a 31-25 vote legislation that would prevent the DoL from using any funds to administer, implement, or enforce the Retirement Security Rule and related prohibited transaction exemptions (though this legislation would also appear to have an uphill battle given the current makeup of the Senate and White House).

Ultimately, the key point is that while the legislation advanced this week is unlikely to be passed before the Retirement Security Rule is slated to go into effect in September, the votes provide a clear signal of Republicans' intentions towards it if they gain control of Congress and the White House in November's elections. Which suggests that even if the regulations survive ongoing legal battles, they could fall to Congressional actions (and/or changes by a new president) as soon as next year, potentially sending the DoL back to the drawing board (once again) when it comes to trying to lift standards for retirement-related advice.  

Federal Judge Puts Fate Of FTC Non-Compete Ban In Doubt

(Madlin Mekelburg and Rachel Graf | Wealth Management)

Non-compete agreements (where a company prohibits an employee from working for competitors, at least for a certain period of time) are often used to help companies protect their investment in the employee (e.g., the time and money spent training the employee) as well as preventing the employee from taking the company's best practices to a new job at a competitor. But for employees, non-compete clauses can restrict their ability to move to a job that offers better opportunities or pay (and can also reduce their leverage in salary negotiations with their current employer, which knows the employee has limited options because of the non-compete clause).

Given the potential negative impact of non-compete agreements on employees' job mobility (including their ability to start their own firm) and earnings potential, as well as uneven state-level regulation of non-competes, the Federal Trade Commission (FTC) in April issued a final rulemaking deeming existing non-compete agreements to be no longer enforceable for most employees (even and including already-existing non-compete agreements, which will only remain effective for senior executives who had already signed such agreements).

The ban is set to take effect nationwide on September 4, but has already come under legal fire, with the U.S. Chamber of Commerce and other business groups filing lawsuits against the measure, arguing that the FTC went beyond its mandate in enacting rules determining what types of business conduct are anticompetitive (the FTC for its part has argued that it has the power to make rules to prevent unfair methods of competition). These suits gained steam last week, as U.S. District Judge Ada Brown issued a preliminary ruling that included a temporary injunction barring the FTC from enforcing the ban against the plaintiffs (including the U.S. Chamber of Commerce, the Business Roundtable, and other business groups) until she issues a final ruling by the end of August. Further, Brown said the legal challenge to the non-compete ban is "likely to succeed on the merits", suggesting that the final ruling could go against the FTC (though the most important part of the ruling could be whether it only applies to the specific plaintiffs involved, or strikes down the regulation nationwide).

While the final ruling on this matter remains to be seen (and might be brought to a higher court by the losing side), it could provide a preview of more active judicial involvement in evaluating regulations following the U.S. Supreme Court's June 28 ruling in Loper Bright Enterprises v. Raimondo that moved authority from Federal agencies to the judicial system to evaluate whether agencies 'really' got it right in interpreting what Congress meant when it wrote the law. Though, regardless of the ultimate disposition of the FTC's non-compete ban, the current discussion surrounding non-competes could prompt financial advisory firms to consider their use of these agreements (and other restrictive employment agreements, such as non-solicits) to determine whether they are meeting firm goals, and, if desired, refine them to reflect the interests of both the firm and their advisors (which could create a more harmonious relationship between the 2 parties, particularly when an advisor does decide to leave the firm).

Traditional IRAs Are A 'Ticking Tax Bomb': Ed Slott

(Melanie Waddell | ThinkAdvisor)

The 'tax equivalency' of Roth versus Traditional retirement accounts exists because, in the long run, the additional value of tax-free growth in a Roth is the same as the additional value of the upfront tax deduction for the traditional retirement account. With the caveat that in the end, the value of the upfront tax deduction on a traditional retirement account is not just a function of the marginal tax rate when the deduction occurs. The value of a traditional IRA will also be impacted by what the final tax rate turns out to be when the dollars are actually withdrawn in the future.

While exact future tax rates are unknowable (though they can be projected), tax expert Ed Slott in his new book, "The Retirement Savings Time Bomb Ticks Louder", argues that individuals with significant balances in traditional IRAs or tax-deferred workplace retirement plans could be facing severe (and perhaps unexpected) tax consequences in the years ahead. To start, he anticipates that Congress could decide to set tax rates higher in the years ahead (whether through the sunset of current [typically lower] marginal tax rates under the Tax Cuts and Jobs Act or otherwise) to raise revenue to meet government spending requirements (including debt service payments). With this in mind, and because tax rates today are at relatively low levels in historic terms, he suggests individuals might consider engaging in Roth conversions to take advantage of today's rates, which could allow them to potentially draw less from the accounts (via Required Minimum Distributions [RMDs] or to meet spending needs) in the future when rates might be higher.

In addition to evaluating an individual's personal lifetime tax burden, Slott also highlights that traditional IRAs and other tax-deferred retirement accounts are "the absolute worst assets to leave to beneficiaries", due in part to the (partial) death of the 'stretch IRA' that came with the 2019 SECURE Act. Because while many beneficiaries could 'stretch' out the required minimum distributions from these inherited accounts over many years before the passage of the SECURE Act, many non-spouse beneficiaries are now subject to a "10-Year Rule" requiring them to deplete the entire balance of their inherited retirement account within 10 years after the original owner's death (which, if they have high income, could force them to pay taxes at a higher rate than might have been available to the original owner of the account).

Ultimately, the key point is that while the potential benefits of engaging in (partial) Roth conversions will be dependent on a client's unique circumstances (e.g., their current and expected future income), the potential for higher tax rates in the future as well as the RMD requirements for account owners and their beneficiaries could make the strategy attractive to many clients. Which presents an opportunity for financial advisors to add significant ongoing value by assessing the potential benefits of Roth conversions each year (e.g., how much could be converted to 'fill' a certain tax bracket and/or considering whether there could be greater benefits from engaging in 'capital gains harvesting')!

How To Explain Roth Conversions To Clients

(Micah Shilanski | Advisor Perspectives)

For financial advisors, it can be easy to see the potential benefits of (partial) Roth Conversions, particularly for clients who are experiencing lower-income years than they are likely to later in retirement. However, because Roth conversions require the client to pay taxes today on the amount converted, the strategy might not seem like such a 'slam dunk' to clients (particularly if they don't understand the potential benefits). Which suggests that advisors can add value for their clients not only by evaluating whether a Roth conversion might be appropriate, but also by communicating their recommendation in a way that allows clients to fully understand the benefits (and costs) of the strategy.

To start, Roth conversions can be explained in terms of 'locking in' current tax rates given the uncertain future of Federal (and state) tax rates and the future trajectory of the client's income. Further, an advisor could note that having additional funds in Roth accounts (alongside tax-deferred and taxable accounts) can provide a measure of diversification (a similar concept to investment diversification, which the client will likely already be familiar with from their time working with their advisor), providing the advisor and client flexibility to generate income from different 'buckets' depending on the client's circumstances in a given year.    

Another way to familiarize clients with the idea of Roth conversions is to make it a regular part of annual client conversations, whether or not they might be appropriate for a client in a given year. Not only can doing so help reinforce the Roth conversion concept in clients' minds (rather than only bringing it up every few years), but also to show that the advisor is providing the 'behind the scenes' value of evaluating whether a Roth conversion might be appropriate for the client each year. Further, in years when a Roth conversion might be valuable, providing clients with the recommended range of dollars to be converted and setting aside the cash needed to pay the tax bill on the conversion (as well as letting them know where the cash is located when it comes time to file their taxes) can make it an even less painful for the client (and their accountant).

Altogether, while Roth conversions often make sense to advisors 'on paper', the decision-making behind the strategy can sometimes be confusing to clients. Which suggests that by making a discussion of Roth conversions a regular part of client meetings and explaining the benefits in terms that the client can understand (without speaking down to them), advisors can potentially help clients save on their lifetime tax bill and demonstrate the ongoing value they are providing in the process!

How To Get More Dollars Into Tax-Sheltered Roth Accounts

(Laura Saunders | The Wall Street Journal)

With the marginal tax rates set under the 2017 Tax Cuts and Jobs Act set to sunset at the end of 2025 (absent legislative action to extend them), many individuals might consider ways to get more money into Roth accounts during 2024 and 2025 to take advantage of lower marginal rates than they might have starting in 2026. While this might mean making the maximum contribution to a Roth 401(k) and/or a Roth IRA (including catch-up contributions for those aged 50 or older!) for many clients, or perhaps (partial) Roth conversions for those with assets in a traditional IRA, some might look for additional ways to get more money into Roth accounts before their marginal tax rate potentially rises.

For clients who are still working and have assets in their employer's 401(k) or other workplace retirement plan, one option is to check to see whether it allows for in-plan 401(k) conversions, whereby the client moves assets from the employer's traditional 401(k) plan to its Roth 401(k) option. To do so, the plan not only must offer a Roth 401(k) option, but also must allow for these conversions (according to Fidelity, these conversions are allowed at about 40% of plans held at the firm). A second option is to see whether the plan allows for in-service distributions, whereby the client could transfer funds out of their company's traditional 401(k) or similar plan to their Roth IRA while still working. While many companies only allow in-service distributions to employees who are at least 59 1/2, some allow employees to make after-tax contributions and transfer them to a Roth IRA. And for clients who have their own business, creating a Roth solo 401(k) could allow for additional Roth contributions (and the opportunity to convert traditional solo 401(k) funds if their plan allows for it).

In sum, there are many ways for clients to increase the amount of money in their Roth accounts during the next couple years, whether through increased contributions or conversions of funds in traditional retirement accounts. Which suggests that advisors can add value for clients not only by exploring the different options available to them to get more money in Roth accounts, but, at a more fundamental level, analyze whether Roth contributions or conversions are the best move given the client's current and anticipated future financial circumstances!    

3 Tools To Differentiate Your Firm

(Scott MacKillop | Advisor Perspectives)

Consumers have a wide range of options when it comes to choosing a financial advice provider, from larger wirehouses and asset managers to smaller Registered Investment Advisers (RIAs). Given that larger firms tend to have more substantial marketing budgets to attract clients (and that attributes such as being a CFP professional, fiduciary, and/or fee-only advisor are becoming increasingly common), smaller firms and their advisors have had to look for alternative ways to differentiate themselves from the competition.

MacKillop suggests that one way for firms to differentiate themselves is to evaluate their website and other forms of communication (e.g., marketing content or social media accounts) to see whether they are "different" on 3 levels: beauty, simplicity, and creativity. To start, while there is no standard definition of "beauty", the idea is that, when building a firm's website, to pay attention to aesthetics (e.g., the colors and images used) in addition to the content being communicated (e.g., using images that reflect the firm's style rather than generic stock photos). Next, given research suggesting that human brains are wired to respond positively to simplicity, creating a website or other communications that are easy for a prospective client to understand (e.g., by avoiding industry jargon and highlighting a few key points rather than providing a laundry list of services or credentials) could lead to more conversions of visitors to prospects. Finally, creativity can allow a firm to stand out from the pack (particularly from the largest firms, which tend to come across as more generic) by communicating its unique story and why it does what it does.

Ultimately, the key point is that at a time when differentiation has become more challenging for advisory firms, a firm's online presence can be leveraged to separate it from the other available options for financial advice and build a stronger brand that could attract more clients!  

Next-Gen Prospects Are Wondering: Where Are You?

(Megan Carpenter | Wealth Management)

While many prospective financial planning clients seek out an advisor through referrals (from friends or centers of influence like accountants or estate attorneys), others turn to the Internet, perhaps searching for "advisor near me" or, if getting (slightly) more specific, "advisor for individuals considering retirement". However, such searches can often be frustrating, as they are bombarded with a flood of firms both large and small with little way to tell them apart.

With this in mind, Carpenter suggests that advisors can stand out from the pack by offering "hyper-relevant content to a hyper-specific audience" when marketing to potential clients online. To start, this could mean creating an "ideal client persona" to whom the advisor is focusing their marketing efforts (which can be easier to do when the advisor has a well-defined client niche, though a niche is not necessarily required for this to be effective). With the persona established, marketing can be tailored to this 'ideal' client's interests and pain points. For instance, a firm working with employees receiving equity compensation could include on their website an example of how they helped a client navigate an IPO and create content (e.g., blog or social media posts) that can demonstrate their expertise in this area so that they are top-of-mind when a viewer decides they want to work with an advisor. In addition, advisors can use social media and their websites to demonstrate their unique personalities (e.g., by including a biography that goes well beyond their credentials and instead shows their humanity and discusses why they serve their target client) to show how they are 'different' than other advisors and firms.

In the end, while tools like Search Engine Optimization (SEO) can be used to help firms climb to the top of the list when consumers search for advisors, advisors can enhance their online presence by demonstrating how they are uniquely positioned to meet the needs of their ideal target client, whether by consistently demonstrating their expertise and personality and/or by providing 'social proof' that they have already successfully served similar clients!

Becoming A "Knowledge Sharer" To Provide Financial Education And Build An Audience

(Alfonso Ricciardelli and Pedram Parhizkari | Enterprising Investor)

There is no shortage of finance-related content available online today, from short TikTok videos to long-form blog content. Of course, the quality of this content can vary widely, with one study finding that 56% of "finfluencers" are actually "anti-skilled", generating negative returns for those who followed their advice (at the same time, these were often amongst the most popular social accounts focused on financial issues), suggesting that there is room for advisors and others to provide authentic, accurate information to followers online.

Rather than being an "influencer" (whose goal is to gain followers to generate revenues from endorsements), an alternative approach is to be a "knowledge-sharer", someone who offers tangible knowledge with the goal of educating others. Notably, while this can be done for altruistic purposes (perhaps to help unwitting consumers avoid falling victim to 'bad' advice that's floating around), it can support business purposes as well. For advisors, this could mean creating content that would be valuable for the firm's ideal target client(and repurposing it across different media platforms!) to provide valuable knowledge to interested followers and demonstrating the advisor's personality and expertise on an ongoing basis in the process. Notably, advisors can further promote the spread of accurate financial information online by sharing and promoting posts from peers and others producing high-quality content (which, in the long run, could create more trust amongst consumers in the personal finance-related content they see online!).

In sum, in a world where much of the finance-related information found on social media is either low quality or downright inaccurate, financial advisors have the opportunity to offer content that can both inform consumers and help their business grow in the process!

A User's Guide To Midlife

(Dana Smith | The New York Times)

One's body often feels its best during the first few decades of life, as it ends to be easier to get more exercise (think recess and after-school sports during the school years) and recover when injuries do occur during this time. But as the wear and tear on the body builds up (and various commitments limit available hours for exercise), many individuals find that their body acts differently as they enter middle age.

One common complaint amongst middle-aged individuals is an increase in muscle and joint soreness. Part of this effect comes from accumulated injuries and wear on the body, but it can also result from the natural loss of muscle mass that comes with age. This can increase the pressure on joints (which also become stiffer themselves), leading to more aches and pains. Further, there is added risk of injury in women, as the estrogen drop associated with menopause can cause their bones to become weaker. And so, while many of these changes come with age, they can potentially be slowed by engaging in regular exercise (with sleep and a healthy diet playing contributing roles as well), as strength training can offset declines in muscle mass and bone density and aerobic exercise supporting cardiovascular health (though be sure to consult with a doctor before making major changes or if you have health concerns!).

Ultimately, the key point is that while certain habits from one's earlier years are 'in the books', there are actions middle-aged individuals can take both to keep themselves feeling healthier as they navigate this period and to put them on good footing as they enter their later years. Which don't necessarily require an immediate life change, but rather making a commitment to a healthier lifestyle, from eating better to exercising more (perhaps starting with regular "walks and talks"?).

Simple Resistance Exercises Improve Overall Health And Reduce Death Risks

(Lydia Denworth | Scientific American)

One of the simplest ways to get exercise is by walking, whether the natural number of steps an individual accumulates during their day or a purposeful walk for exercise. In addition, those looking for a more strenuous aerobic workout might choose to jog, run, or hop on a bike to up the intensity level. Nevertheless, while aerobic exercise is an important part of a healthy lifestyle, engaging in complementary strength training can provide added benefits to one's health.

According to the U.S. Centers for Disease Control and Prevention's physical activity guidelines, adults need at least 150 minutes of moderate-intensity physical activity (i.e., aerobic training) as well as 2 days of muscle-strengthening activity each week. Like aerobic training, strength exercises create better fitness by making the body adapt to stress and become stronger, though the latter offers benefits from the way it taxes muscles (i.e., generating microscopic tears in muscle tissue that prompt the muscle to repair itself and build more fibers to become stronger). Which can ultimately lead to better health outcomes; for example, one meta-analysis found that individuals who engaged in muscle-strengthening exercises were associated with a 10–17 percent lower risk of all-cause mortality compared to those who didn't, with a separate study looking at older Americans showing that those who did both aerobic and resistance training had the lowest mortality in the entire group. Further, strength training can potentially increase quality of life as well, pushing back against muscle and bone loss that can contribute to aches and more serious injuries.

Notably, strength training does not necessarily mean one has to load up the bar for bench presses or squats; rather, starting out with moderate resistance training (e.g., using light weights or elastic resistance bands) can help start the strength-building process. The keys, though, are consistency (e.g., perhaps twice per week, which allows for recovery between sessions) and progressively increasing resistance levels (e.g., the amount of weight being lifted) to build strength over time.

In sum, strength training can be a valuable complement to aerobic workouts, supporting one's health and longevity in the process. And while the specter of a heavy lift might lead to some 'resistance' from those getting started, taking it slow to start (and gradually increasing the workload over time, perhaps with the support of a professional trainer) can help create a regular strength training habit that could last a lifetime!      

Targeting The 4 Pillars Of Exercise As We Age

(Peter Attia)

During middle age, when work and family obligations can pile up, it can be easy to let exercise fall through the cracks of one's regular routine. At the same time, it is never too late to gain benefits from regular exercise, which can lead some individuals to try to build regular workouts back into their weekly schedule.

Attia divides exercise into 4 pillars: stability (i.e., balance and flexibility), strength, aerobic efficiency, and peak aerobic output. With this in mind, understanding how different exercises meet one or more of these pillars can help an individual craft an exercise plan that hits all of them. For instance, certain activities might target one of the individual pillars (e.g., yoga for stability, weightlifting for strength, or moderate work on a stationary bike for aerobic efficiency), while others might target several at one time (e.g., rucking [i.e., walking or running while carrying a heavy weight] can potentially target all 4 areas at once). And so, creating an exercise plan that hits each of these pillars (and reflects one's current fitness level) can help ensure that an individual is able to gain the benefits that come from each type of exercise (from better balance that can help prevent falls later in life to strength that can help slow the loss of muscle mass that comes with aging).

In the end, exercise is not dissimilar to saving for retirement: while those who start early can benefit from years of compounding, it's never too late to gain the benefits of saving. Which means that even if an individual hasn't exercised regularly for many years, starting later in life can still provide a boost to their quality of life and overall longevity.

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We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog.